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Start-Up Spirit

July 3, 2012

Wall Street bond desks are 3,000 miles away from Silicon Valley, and the often buttoned-down culture of New York market professionals can seem like a world away from the exercise-ball chairs and foosball tables of California tech start-ups.

Broadway Technology, a provider of software and electronic systems for bond traders, seeks to bridge the gap.

“Financial-services software is the most complex and hard to develop of any industry,” said Joshua Walsky, co-founder and chief technology officer at Broadway. “We are therefore building our company in terms of the spirit, talent and mindset of Silicon Valley. We are a technology company, run by engineers.”

Broadway Technology was founded in 2003 by Walsky and Tyler Moeller, both high-frequency algorithmic traders with advanced degrees in computer science and backgrounds in enterprise software. The company aims to foster a high-tech culture, and executives say it competes for talent with the likes of Google, Facebook, and Microsoft.

Broadway’s core TOC software product provides an infrastructure for uniting disparate trading systems, data stores, and compliance systems, Walsky told Markets Media in a June 8 interview at his Lower Manhattan office, which just a stone’s throw from the iconic charging bull sculpture. Broadway also has an office in Austin, Texas.

“The TOC is a high-performance distributed computing architecture,” said Walsky.

Finreg Backdrop

Headwinds generated by developing regulation and market-structure changes, in conjunction with persistent global macroeconomic woes, have created arguably one of the most challenging environments ever seen on Wall Street. The regulatory push for more transparency in previously opaque derivative securities can be a boon for technology providers such as Broadway, who can help market participants manage the new landscape, for example by connecting with platforms such as Swap Execution Facilities.

We are a technology company, run by engineers.
Joshua Walsky, co-founder and chief technology officer at Broadway

“There is great growth potential,” said Walsky. “We expect that when regulatory changes hit, we could see, in the next year or two, 30% of our revenues come from SEF-related business.”

“Now that the financial industry has changed, people who work at big banks and are used to big IT budgets have seen their budgets reduced but face increasing regulatory pressures,” Walsky said. “We service the big global banks as well as the small two-person hedge funds.”

Broadway’s revenue has increased by about 50% annually over the past four years, Walsky said, and the company has been profitable every year since inception. The 60-person firm stands to benefit not only from pending regulation, but also from a sour market climate that has traders needing to upgrade technology with smaller budgets.

Moeller said Broadway does not have any true, apples-to-apples competitors. “There are certain niche spaces where we may run into competition but those vendors rarely can do more outside of that space,” he said. “We’re in a great position.”

In a vote of confidence, Broadway took in a strategic minority investment last December from customers including Goldman Sachs.

Walsky noted that major sell-side banks, several of which are customers, have problems of their own. “Increased competition, declining revenues, and regulation are putting tremendous pressure on firms’ bottom lines,” he said. ”Dodd-Frank is on everyone’s mind.”

Market participants are struggling to come to grips with the transparency and reporting requirements of new regulation.

Non-Standardized

“I wouldn’t say there is a consistent paradigm across the industry used to address these issues,” said Walsky. “There is tremendous diversity and inconsistency in business processes and technology across the industry.”

Moeller added: “The TOC lets us and our customers build larger, faster, more adaptable systems than they ever could before. There’s nothing like it in the financial industry, and we see fantastic opportunity to expand the TOC into other industries as well.”

It’s possible to combine any mix of technologies and also to scale to any number of users or machines in any number of locations, according to Walsky. “The TOC can be integrated with an existing infrastructure, and it allows the use of any mix of our products, other vendors’ products, and custom-built applications as a single cohesive system,” he said.

The TOC makes it possible to build virtually any trading capability quickly and easily.
Joshua Walsky, co-founder and chief technology officer at Broadway

In most cases, there is a mass of custom in-house systems with a smattering of commercially available software that must be deployed to comply with new rules.

“This means ad hoc integrations — ‘shortest-path’ integrations — and data-capture mechanisms like flat files or additions to existing databases,” said Walsky. “There isn’t a consistent interpretation across the industry about exactly what the different regulations mean. The answer to whether a specific platform falls within a specific regulation isn’t always clear. Thus, there isn’t even agreement about what exactly needs to be done, let alone how to do it.”

With the impending shift from bilateral voice trading of derivatives to electronic markets due to the inception of SEFs, more firms are tapping outside technology providers for assistance. “We have seen a jump in demand for our technology and services directly related to the changing regulatory environment,” Walsky said.

This approach allows firms to focus on technology while simultaneously preparing for impending and still unknown changes in swap markets.

“Firms that invest in superior technology will benefit tremendously from the creation of new electronic markets,” said Moeller. “And now that we’ve brought the powerful combination of Broadway’s turnkey trading solutions and enterprise platform, the TOC, to (interest-rate) swaps, our customers will have a strong competitive edge.”

An important implication of regulation-required trading limits is the need for up-to-the-moment visibility into trading activity and the ability to implement controls that automatically intervene when compliance rules are triggered. For example, the pre-trade risk controls needed to comply with the SEC’s Rule 15c3-5 require the amalgamation of trading and risk data that typically resides in different systems.

To address such requirements, firms are adopting new technologies to simplify and unify their system architectures and data flows. Once that problem is solved, collecting data, storing data and implementing automated event-driven risk controls is straightforward.

Firms are adopting these technologies for both compliance and for general business automation improvement reasons. “Rationalizing, normalizing, and organizing data is the hardest part of the problem,” Walsky said. “It requires integration with disparate systems, efficient transformation of large amounts of time-sensitive data into a common and coherent format, and a flexible data distribution platform to make that data accessible.”

Data Coalescence

One need is to get all data into one place in a rationalized readily operable format, according to Walsky. “This data lives across dozens of disparate systems across the firm and the difficulty of connecting those cannot be underestimated,” he said.

“Once you’ve got it in the same place, you’ve got to make it fast enough to meet the demands of the market,” Walsky continued. “Those two issues, although easy to explain and put on a PowerPoint, are tremendously difficult to actually accomplish.”

Traders used to achieve this by ‘swivel-chair’ integration. “They would look across three screens and a handful of different applications to check all the numbers. However, that doesn’t work for regulation,” said Walsky. “It isn’t acceptable to have a person as your integration media anymore.”

Instead, this data needs to be integrated at a system level, which essentially defines the so-called Big Data problem in finance.

The TOC, which was originally developed for trading U.S. Treasuries and other cash securities, has been extended to cover the OTC markets.

“Customers want a swaps solution that’s flexible,” said Walsky. “They know that the markets will become electronic, but they don’t know how and when regulations will hit.”

Broadway Technology is taking elements of TOC — such as liquidity aggregation and position management — that have been proven in foreign exchange, Treasuries and futures, and adapting them to the OTC markets. This starts with interest-rate swaps in the U.S. and then extends into credit derivatives.

The idea is to automate largely manual processes, much as what has already taken place with equities and other listed products. “Our objective is to take pricing models that are on spreadsheets, and make them robust enough to encompass new electronic markets,” said Walsky.

Because regulation is in flux, electronic swaps trading markets are likely to evolve in a number of directions based on available liquidity.

For more liquid instruments, a central limit order book in traditional equity style could develop. For less liquid instruments, a request-for-quote system, in which a customer submits quotes and receives bids from a number of dealers, will be the norm. Dark-pool-like variants of the RFQ model are also possible.

“Dodd-Frank doesn’t mandate a specific trading model,” said Walsky.

“We see a spectrum of models, including those used in cash markets such as central limit order book, as well as those patterned after the traditional dealer-to-customer trading models.”

New regulations will impose data requirements, which will be felt mostly in the front office at the point of execution, according to Walsky. Rules such as SEC rule 15c3-5 or the EU’s MiFID are placing enormous demands on transactional and order-execution systems.

From an execution system perspective, it used to be adequate to know the price one wanted to transact on a particular platform and whether or not one subsequently transacted. The transaction system’s responsibilities pretty much ended there.

Now, a transaction system probably also needs to know and record prices across similar platforms and assets to make sure prices quoted to customers were fair.

Additionally, to make sure risk limits aren’t violated and market access regulations are upheld, that system will need to know who did the trade, who they did it with, possibly why they did it, what their risk limits are, and how much room is left in those limits. This entails a collapsing of data.

“To meet these regulations, firms must now bring together different data from across the organization. This data used to be managed very separately, by separate systems and, in some cases, by separate departments like the front office versus the back office,” Walsky said. “Meeting new regulations will require bringing this data together in a single place in a single system.”